INTRODUCTION TO MICROECONOMICS
Presented by Murray N. Rothbard in 1986 at New York Polytechnic University. Recorded by Hans-Hermann Hoppe.

8. Intro to Micro: The Firm

Business men must make sure they can cover their costs by incoming revenue. The production function will yield a certain quantity of a product. The firm considers marginal costs and average costs to weigh where along the demand curve production is. Average revenues less average costs multiplied by quantity will reflect profits (or losses) for the firm. Every firm (not industry) will always be where the demand curve is elastic. Perfect and pure competition is where the demand curve for the firm is infinitely elastic – horizontal. Real life has falling demand curves. Everybody becomes a monopolist. The anti-trust movement was meant to purify competition. Monopoly had always meant government grants of privilege to certain industries. But now means falling demand curve – that’s everybody.

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okay we got a lot to cover someone over
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is getting told the end of the term I
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can’t believe it nothing why this is the
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way it is the ok we have dollars really
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the usual the man curve which we carry
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over from the first part of the course
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price on the y-axis quantity x axis man
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the service falling total revenue can
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either go up or down depending on the
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elasticity ok TR TR is equal to price
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times quantity and the other curve here
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we have dollars on the y axis quantity
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of the x axis people we now have a TR
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curve which can either go up or down so
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that obviously can only go up from the
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point of origin since it starts at zero
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if you sell your making you produce and
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sell zero TV sets like I saw no TV sets
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and therefore my total revenue from
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selling TV 70 we started the point of
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origin zero quantity 0 total revenue and
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a total revenue curve then has to go up
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from zero and goes up and then goes
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either goes up or down etc some kind of
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peak trough situation to the extent that
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it goes up demand curve is elastic in
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other words this is the area of an
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eating with a buddy Willie when total
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revenue is increasing as quantity
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increases this is a definition of the
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matter of the elastic other words as
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quantity increases like so and total
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revenue is going up this means that the
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good man curve of the elastic and that
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zone ok so this is the elastic demand
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curve then as weak as it goes down the
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definition of a demand curve is
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inelastic in other words as the quantity
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goes up we now get in the situation
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where total revenue declines and so have
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to say here as the theta max a total
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revenue is now less so in that situation
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we have an inelastic demand curve and it
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goes up again elastic and then inelastic
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Oh in the textbook as I mentioned last
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time all these problems are resolved
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because there’s just one
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peek in other words the coal revenue
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curve is drawn like this and so that
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situation it’s very easy it’s elastic
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here and then it becomes inelastic but
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it doesn’t have to be only one thing it
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could be several piece so I’m making it
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growing it this way to show them in real
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life it can be multi peak okay so you
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have a total revenue curve which is
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those like that meaning you don’t know
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whether it’s going lovey going up or
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down any given moment could be either
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way the total cost curve I trimestre
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last time is always going up total cost
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curve starts off at zero the point of
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origin of all that’s what the book says
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in other words if I I am producing no TV
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sets I produced no TV says I solo TV
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says therefore I might cost and incur to
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producing TV says is zero I started the
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point of origin all of us this stuff is
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purely short run in other words if I
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happen that happen to be a motorola
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producing TV no I’m retooling for six
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months because of the TV says aren’t
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selling I might be having fixed court
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there really are no fixed costs any sort
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of long-run sense okay yeah yeah well
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not if you’re out of the business I mean
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I you don’t have to be in nobody’s
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compelling you’re being a business of
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selling TV sets okay in other words i’m
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not saying obviously in some short run
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situations before you’re as you’re
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gearing up you have course then you have
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yeah revenue but there’s nothing to
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compel you in the long run it’s to stay
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in business you’re not selling anything
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the point is that there are no fixed
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costs over a chef or short runs their
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short run fixed costs but there are no
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real fix both in any real no philosophic
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sense or speak also the variability of
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the costs are married over for any given
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every get any given unit and we gonna
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give them plant plants are more or less
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fixed machines or less fixed you know
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separate separate so different the
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visibility’s I’ll get into that later on
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them today but the the point is there
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are no fixed costs not really nothing is
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fixed you know if you figure you’re
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losing money in this business you get
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the hell out you sell the plant you
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close then you sell a plant you know
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it’s all for scrap if necessary them in
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your fiery buddy it stopped
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you break your lease or leave or you
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transfer at least somebody else use then
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you get out so so call fixity is only
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very short run there’s no sort of
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there’s nothing imposed upon you by the
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divine commandment some things are
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texting other things a variable
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everything is variable at the point of
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time all course of variable at different
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degrees some courts are easier to get
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rid of than others for example if you’re
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on the TV business you decide to get out
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you can immediately stop buying
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stationery that’s easy or buying the
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quiet please aight Wyatt or you can you
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can stop selling your buying paper clips
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the other hand that’s the fire everybody
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is towards we’re more difficult takes
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more time i’m more of a decision longer
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decision so okay so the the aim of every
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firms to maximize its profits or
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minimizing losses and therefore they’re
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trying to get in a situation was the
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biggest distance between told love you
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in total cost but their objective to
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maximize PR minus pc or profits if
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they’re lucky holes in a good shape this
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will be positive in some cases it can be
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negative in some cases you might have
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this kind of the jewish total Oscar like
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that and a total revenue curve like that
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and you’re a really bad shape whatever
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you do you lose money eventually of
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course you go out of the part of
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business you cut your face to face
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that’s not a market activity so anyway
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the maximum profit point production you
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try to produce so that you maximize your
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profit the maximum profit one of the
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attributes from maximum profit point of
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production is that the slope of the
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tangent of pro revenue and total costs
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are the same so that the slope of the
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tangent prpc is the same then you’ve got
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marginal revenue equal to marginal cost
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marginal revenue is the fine as Delta
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Delta P R over Delta Q in other words
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you’d produce one more item one more TV
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set one more package of nails whatever
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you’re selling
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one more on how much more total revenue
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will be brought in by that one more
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items that’s the essentially the slope
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of the tangent if you’re given if you
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have an infinitesimal degree that
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doesn’t becomes infinitesimally becomes
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VT r DQ marginal cost is also reason why
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I prefer to stick the deltas and real
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life nothing is infinitesimal human
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actually buying or selling in producing
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it’s not an infinitesimally small and
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kind of peasant moves more this is v pc
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/ DQ so in other words you produce and
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sell one more unit of the item how much
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was extra unit cost you and so the
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maximum profit point is when the two are
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more or less equal when the delta
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marginal revenue and marginal costs are
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equal now the thing is we should not
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make too much of this because watching
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once you realize there can be more than
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one peak as the textbooks never realized
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then you can also have a minimal a
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profit it could be at this situation
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that the tangents are equal here slope
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of the tangent legal and yet you’re in
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very bad shape but also equal up here
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you don’t know which is you don’t know
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offhand which is bigger this or that
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unless you look at the actually inspect
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the data and find out so the marginal
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revenue equals marginal of course
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criterion is a very very very weak one
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it only applies if you’re have only one
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peak and it’s better if you have the
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data your business man is much better to
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figure out what the total is and not
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worry about the margin it really the
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only important thing about the margin is
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that emphasizes the fact that every step
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the businessman takes every decision
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businessman takes every new unit that he
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produces he has to worry about covering
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course if the figure is not going to do
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it unless the lessee covers costs as
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revenue and course or equal first
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decision hopefully the course is greater
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than revenues greater than the cost
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that’s it that’s the major impose offing
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important so to speak of cross training
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on the margin the rest of that is mostly
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overblown on the importance really
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overblown of this okay average average
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revenue this TR over Q in other words if
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you want to find out if you’re producing
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you sell it produces sell 100 units of
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something hundred packages
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Wheaties or 100 loaves of bread or
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whatever what’s your average revenue is
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gonna be the total you yet total income
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divided by the quantity even the income
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per loaf of bread or income per TV set
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which is forces the same thing as a
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price in other words p times q is equal
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to TR so average revenue is the same
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thing as price is another another name
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for price of something if somebody sells
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10 loaves of Wonder Bread against ten
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bucks for it means of the price of the
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Wonder Bread the average revenue of one
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of those with dollar per lo ok so this
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is this is the old friend of the man
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curve this is the demand curve price
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curve so to speak price and relating
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price and quantity marginal revenue I
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mean average to the average cost is
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equal a total cost per unit total cost
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divided by Q also you can call average
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total cost that the clearly distinguish
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we’re not talking about average fixed
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cost average variable or so the nonsense
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I will not talk about sex the variable
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costs from now on when I told an average
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course is average total cost average
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course total cost per unit of course
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your hundred thousand dollars but this
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cell producing so 10,000 items and
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therefore the cost per item is 10 bucks
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that’s sort of ok now the relationship
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between marginal on average there’s a
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certain relationship between all margins
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and all averages we’ll get to that later
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and get the labor market the factory
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production markets too it’s a purely
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mathematical constant relationship
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there’s nothing to do with economics but
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it’s ready it’s using economic so we
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should go through it relationship is as
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follows supposing for example are taking
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the average we take the average height
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of this class you know each of us has a
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certain height we totally total of a
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hike we’ve divided by whatever it is
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it’s funny people we get the average
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height to basketball players walk in and
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7-footers then we take another average
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and of course it’s going to pull up the
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average not as much as 7 feet but could
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pull up from whatever it is 58 or
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whatever list of the 59 or something in
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other words if the if an average an
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average of X is increasing
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then the marginal X that’s higher than
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the average average of X in other words
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at the am if you see an average going if
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an average is increasing like the
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average height of a class increases from
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now to half hour from now means the new
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guy coming in new people coming in a
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higher than the average that’s why the
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average is going out in other words they
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the increased margin pose the average up
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so if you have an average or every of
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anything it’s not just a height advice
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anything average income average weight
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average whatever intelligence coach
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whoever happens to be any if the average
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is going up it means the marginal of the
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thing average of X mooresville X is
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higher than the average wherever it is
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on the other hand same thing applies the
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other other direction as will all evolve
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a symmetrical if we take the average
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height of two midgets walked in to
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four-footers it’s going to pull down the
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average I think me for the average of
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something is decreasing the average of X
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is decreasing then the this means that
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then the marginal of X less than the
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average of X then it will make this
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greater than here symmetrical so so in
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other words if you see an average of
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something decreasing it means that the
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margin is pulling down the average these
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two midgets are three majors whatever
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they’re pulling down the class average
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and height so this isn’t the other laws
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symmetrical the first one so that means
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if you have an average of anything is
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decreasing it means that the margin of
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the below the average actually where we
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have okay here we have an average of
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something doesn’t matter what it is say
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height matter and this average is going
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up for me
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the Mortons above it somewhere if the
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average is going down these are mortgage
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below it somewhere all right margins of
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the average well okay if that case okay
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this is pretty obvious but in that case
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it means that when the average reaches a
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peak it reaches a peak point which means
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it’s constant for that moment was the
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average GPA must mean of the marginal
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equal of the average it’s the only way
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you cut through you can’t leap across
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the dimension here so it must mean that
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that’s a point when average flattens out
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before it falls the margin equal to it
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well if this follows from these two
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points these two axioms here or everyone
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colon propositions so therefore okay
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when the average of X is at a peak in
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other words when it’s constant then
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average effective equal of a marginal of
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X it also works for the trough point in
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other words to leave the average is
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going down now we did something and then
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it goes up and goes down the margins
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below it somewhere marginal the average
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is going up Muslims above it the average
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this means that when the average is
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flattens out becomes the fourth of a
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12-point the marginal must be equal to
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it so this is okay so they’re so when
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the axe at afx the ear either a P order
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trough is that a peak area of caught the
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average is constant for that moment then
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the average of x is equal emotion this
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applies to all averages and all
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marginals crag applies to everything in
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life just an economic you just build a
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few things here but you can carry over
15:11
all of life now you have this great
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piece of knowledge which means good hook
15:15
serve you in good stead forever and all
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the old fields of endeavor height weight
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I think I cute pets or whatever in the
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case of microeconomics the average costs
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as we’ll see in a minute average for
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spender
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have a u-shape something like that see
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why I was total cost an average score
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the something like that in other words
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the clines reaches a trough point and
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then goes up this is dollars on the
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y-axis quantity of goods in the x-axis
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we haven’t demonstrated this year I will
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demonstrate this little later i’m just
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pointing out if it has this kind of a
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u-shape then average cost orjinal course
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will we be below it when it’s declining
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but we be above it when it’s going up
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okay because as follows when the average
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of anything fools the marginal is below
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it below the average the average of
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anything is going up the mortgage on to
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the above the average and when the
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average of anything is at a trough point
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the marginal equal to it so therefore
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marginal costs if the average course
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really have some kind of a u-shape kind
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of shape then the marginal course sweet
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something like that and they will equal
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each other at the trough point for for
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average for revenue a little bit
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different because since the demand curve
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is always falling okay their average
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you’re up the man is equal average
16:49
revenue so the average revenue is always
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fun though such thing as a rising
16:52
average revenue curve okay so this is no
16:56
learn and so the marginal revenue will
16:58
always be below it what’s this average
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revenue is always falling if even
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marginal revenue is always below it and
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always will be like this matter of fact
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eventually you won’t hit the x axis keep
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going like that so this accounts for the
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shape of a marginal curves in the book
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in other words given the average curve
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gives the man curve is always falling is
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that such that the marginal curves
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always falling and will always be below
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it and will actually fall more steeply
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say that and if the average curve is U
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shape and I haven’t demonstrated that
17:29
yet then the marginal curve would be
17:31
something like that hitting intersecting
17:33
at the truck point both this is all
17:36
really mathematics it’s it’s a now
17:38
applied to microeconomics and later on
17:41
we’ll see how this applies with
17:42
productivity curves they’d like that
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okay let’s get to the average cost curve
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why if you shake or whatever when you
17:52
think of economy of large-scale
17:53
production those of you walk of the idea
17:55
of a total cost curve is always going up
17:58
and say no no but cool costs so how
17:59
about a normal yield plant isn’t most
18:01
costly to have a large-scale production
18:02
it’s true but for average course if
18:04
you’re talking in that average total
18:06
course okay let’s look at the average
18:10
cost curve as simple as you might think
18:12
why it is something like you shake now
18:19
we get to some more philosophic
18:20
mathematics set of speakers is this is
18:23
philosophy of life for the mathematics
18:24
applied to it we haven’t in real life so
18:29
to speak causing the law of cause and
18:31
effect which essentially says given the
18:34
causal factor given a certain quantity
18:37
of causal factors real yield a certain
18:41
result certain effect and these this
18:44
cause and effect relationship we will be
18:45
duplicate can be replicated at any time
18:47
or place in other words you can set side
18:50
by side you can produce whatever it is
18:52
you do the copper sulfate in a certain
18:53
way reduce the same copper sulfate you
18:56
know next week or two blocks away and so
18:58
we’re and so on so this is a basic law
19:01
of life the equal causes yield equal
19:04
effects at the avid and they have a
19:05
natural law situates for natural law of
19:07
nature after a loss situation okay we
19:10
can express this the expresses natural
19:13
law situation and production by
19:16
mathematical formula my generalized
19:19
mathematical formula for the production
19:21
function it’s a very general law but
19:25
what is it expresses certainly basic
19:26
truths my production she says it
19:31
relate it says as follows given it
19:33
applies to all the production of
19:34
anything really p’lice any any kind of
19:36
action for that matter and he can’t
19:38
quantitative an action of any sort I me
19:40
to buy a sandwich you have to do certain
19:42
things you have to go downstairs have to
19:43
go to michelangelo’s I’ve got the
19:45
sandwich on what sort of thing pay
19:46
certain amount of money leave that out
19:48
it’s a physical production function what
19:52
you’re saying is this to produce
19:53
anything you need certain certain and
19:56
factors of production need certain
19:58
amount of Labor land capital certain
19:59
types and sever and so on a certain
20:02
quantity
20:02
factor X I’m a certain quantity alpha
20:06
whatever the quantity is five of it
20:08
three of it well you know differ from
20:10
from from from from good that’s good it
20:13
has H good and service has no technology
20:15
of it alpha of X combined with this is a
20:20
symbol for combined with huh who the war
20:29
but this combined with beta certain
20:33
certain quantity of why thank your wine
20:36
complying with a certain gamma certain
20:38
quantity of factors Z combined with a
20:41
bunch of other factors dot dot dot will
20:45
yield a certain quantity of a product q
20:50
of do a pee like peas usually price
20:57
let’s make it our queue of are you a
21:00
certain product in other words you take
21:03
a certain a certain number a certain
21:04
amount of factor X and bind it with
21:07
certain amount in a certain way but
21:09
certain amount of factor Y combined
21:11
money with certain matter of fact is the
21:12
separate step you will get five eggs or
21:15
three TV sets or whatever happens to be
21:17
you get a certain quantity of a product
21:20
this applies to any product of any sort
21:23
doesn’t matter what the actual good a
21:25
service a happens to be okay this is
21:29
this is a generalized production
21:30
function this is you have a law of cause
21:32
and effect you can replicate it you can
21:33
put it side-by-side somewhere and
21:35
duplicate it you’ll have then alpha NEX
21:38
my own beta Y combined with gamma Z etc
21:45
side by side produce another cube of our
21:48
other three TV sets or another 28 loads
21:51
of Wonder Bread whatever happens to be
21:52
so this means that you can add you can
21:54
keep adding indefinitely so therefore
21:57
instead of the amount of course you can
21:58
multiply each of these factors by n so
22:02
this means a 10 times alpha modern times
22:05
beta X 1 times gamma will yield n times
22:07
the product this is purely as follows to
22:11
the law of cause and effect so this is
22:15
our
22:16
no I structure-function those of you are
22:18
mathematical mavens is also called a
22:20
linear homogeneous production function
22:22
don’t ask me what this means revived
22:24
okay I’ll just faded so okay so this
22:34
means that from the physical point of
22:36
view the tradition point of you a
22:37
physical product physical factors or
22:39
whatever if you’re if you’re a business
22:42
firm now to get back to the firm and
22:45
you’re hiring factors are you producing
22:47
certain things in getting the product
22:49
this means that the average cost of
22:52
everything should be should be should be
22:54
cuspid in other words it’s to produce I
22:58
don’t put this 100 loads of Wonder Bread
23:00
you need alpha whatever the boots a
23:04
thousand ten times as much and we just
23:07
saying we just said this this are our
23:09
basic law linear homogeneous reaction
23:10
function so this means that the average
23:13
therefore cost is the dollars that you
23:17
need five times as much of everything to
23:18
produce is five times of a product so
23:21
therefore it should be as the average
23:23
course is horizontal there is total cost
23:28
will be horizontal and since it’s not
23:32
obviously not horizontal question is how
23:34
come here we have it’s a real problem
23:36
and it obviously does not cost if you
23:40
want to produce one car a year you’re
23:42
not going to build a 100 million dollar
23:44
automobile plant with all the equipment
23:46
I’m right now with one quart you have an
23:47
astronomical cost per car have a huge
23:50
fixed court situation of course it’s
23:53
something on one thing that violates our
23:55
right away of course is when the price
23:56
goes up and we’ll see you later on also
23:58
some even more if you keep producing
24:01
more and more of this thing grinding out
24:03
and in many ends in other words losing
24:06
ten loads wonder about ten cars one
24:07
hundred thousand a million you know
24:09
start bidding up the demand curves the
24:11
various factors of labor in other words
24:13
you produce you’re buying more too many
24:16
more labor or raw materials or land you
24:18
canif it the prices up so the wage rates
24:20
and raw material prices and all these
24:23
things will go up so eventually even on
24:27
even if everything is constant because
24:29
the price is going
24:30
up the price of the factors of
24:31
production of course the place of the
24:32
course one point of view of price and
24:34
the price of Labor price of land well
24:36
material you’ll have something like that
24:38
so you’ll have average course will then
24:40
go up but the real problem is how come
24:42
what about the sloping course as we know
24:44
we know of course the average go that’s
24:46
full of over a long distance you start
24:48
producing so the question is where does
24:49
that come from why does buddy have a
24:51
full an average cost per why does it why
24:53
is it more economic to have a huge
24:55
assembly line for forma Beals producing
24:57
a million cars the years to have a five
24:59
cards a year why isn’t just as a you
25:01
know why is it much costlier to have a
25:03
small unrevealed plant and the other
25:07
thing we haven’t explained that yet so
25:09
in other words with a philosophy we have
25:10
the a ver constant average cost curve
25:12
and then knowing that increase in demand
25:16
curve will raise the price of raw
25:17
materials and labor etc we should have
25:19
explained the average costs are going up
25:21
to the end we can’t explain as why it
25:24
falls on the early parts production so
25:32
yeah this is a reason why I’ve Falls
25:35
allegedly violating all of this law of
25:37
linear homogeneous structure it
25:39
doesn’t really violate it problem is you
25:41
can’t multiply everything by N and real
25:43
like that’s the problem well you can’t
25:45
take x and q can’t both want each thing
25:52
by n because each factor of production
25:53
is a different and the visibility this
25:56
is the so call indivisibility problem
25:59
you can for example multiply paper clips
26:04
by n now if you increasing the
26:07
production of something my pencil is
26:08
going to be have ten times many paper
26:09
cuts no problem of that or ten times as
26:12
much may own many nails or something
26:14
like that which are very divisible other
26:16
words some factors of production some
26:19
capital goods ephrata visible others are
26:20
very indivisible just the nature of
26:21
technological nature of the Rana visible
26:23
you can’t multiply the plant by factory
26:25
by 10 you have ten times many machines
26:27
maybe but you can’t have ten times many
26:30
factories the most the famous case of a
26:32
very indivisible there are different
26:34
degrees of indivisibility this is this
26:36
is what I’m getting back to the stone
26:37
was point about fixed course there are
26:39
different degrees of fixity the
26:41
different degrees of variability
26:43
the problems of textbook they say some
26:45
costs are fixing owes a variable
26:46
everything is variable but at different
26:48
degrees for example of the most famous
26:51
case of a very indivisible capital good
26:53
as a railroad track let’s say you have a
26:55
railroad going from here to Boston and
26:57
you’re increasing your doubling the
26:59
amount of shipments on because you have
27:01
more business we can double the number
27:02
of railroad cars maybe you can double
27:05
number railroad workers and engineers
27:06
and firemen so if you can’t double the
27:08
track I mean the double of track is a
27:09
big thing big deal takes a long time you
27:12
have to lay the track and all the rest
27:14
of us it’s not very easy so you have
27:16
different degrees of indivisibility
27:17
railroad track of them one of the most
27:19
least the visible panic I think I almost
27:21
in the visible thing factories are quite
27:25
indivisible machines are less
27:27
indivisible or then a different machines
27:29
or material is very divisible can get
27:32
more you know for material coming
27:34
through pretty easily labor has
27:36
different degrees of the visibility
27:37
etcetera etc and something like paper
27:40
clips are very divisible so you can
27:43
prank this you can’t increase everything
27:45
by n some things can be doubled other
27:47
things can’t something’s gonna be triple
27:49
easily you can quadruple say this before
27:51
you can double this and so it’s because
27:53
of that because of these these degrees
27:55
of indivisibility that you have a
27:57
falling cost average cost curve in other
28:01
words you start with a plant let’s say
28:02
you’re producing automobile if you start
28:05
have a huge plant or a big equipment
28:07
more Restless stuff before you can
28:09
produce anything if you produce one car
28:12
a year you got an enormous you know 100
28:14
million dollars per car costs if you
28:15
have an enormous course in order the
28:17
gear up this thing because these are all
28:19
very indivisibly have a stratospheric
28:21
average cost problem as you keep
28:23
increasing the output then your lower
28:26
the overhead costs other words then you
28:27
begin to have very rapidly decreasing as
28:30
you as you start using this very
28:32
indivisible mission is like a big
28:33
computer ever use your mainframe
28:34
computer like in the old days ticularly
28:36
they have to use on a lot that make the
28:38
negative efficient bring down with
28:40
average cost per unit says you increase
28:43
the units of production you have a very
28:44
rapid fool in average courses you keep
28:48
tapping more and more the indivisibility
28:50
you start using it’s very indivisible
28:51
it’s like saying I usually picking up a
28:55
100 million dollar machine or
28:57
whatever using only once a year one our
28:59
ears it’s crazy it’s a very high average
29:01
cost per unit as you keep using it you
29:04
lower the indivisibility as you keep
29:06
increasing the quantity more and more of
29:08
Enda visibilities of paths and where
29:10
you’re using it more and more two more
29:11
capacity production as you do that you
29:14
start getting funny funny level of all
29:16
fees you probably begin to use it at
29:17
capacity most sentra preneur is when
29:19
they’re building a plant are thinking of
29:21
a certain range of production they’re
29:22
going to use it then you know 100
29:23
million cars a year or something they
29:25
will design a plan such a way it’ll be
29:27
the most efficient or lowest average
29:28
course I’m more or less than million a
29:30
year and there’s be certain range
29:31
because it it’s not god-given this could
29:34
be the same number cards for ten years
29:35
of 20 years and more or less they know
29:37
the rain nobody nobody thinks of
29:39
reducing one car a year when the owner
29:41
of violence she first started they grew
29:44
up in blacksmith shops are nineteen
29:45
hundred small bicycle shops bicycle
29:48
shops they produce one car a year at
29:49
Penn card years something like that they
29:51
were geared for that was the most
29:52
efficient lowest average cost is more
29:54
like a tank cars a year but after they
29:56
start going into mass production for
29:58
whole thing changes so as you get as you
30:02
keep increasing the quantity finally get
30:03
to the point where you’re more or less
30:05
using everything the capacity you start
30:07
over using things and you as you keep
30:08
going you start over using various
30:11
prodding int year in such a way that
30:12
everything meshes together at once so as
30:14
you keep increasing the quantity you
30:16
start having problems of overuse
30:17
breakdowns of equipment and your average
30:20
course we’re going to turn up and then
30:24
you have finally as you have a big mass
30:26
production factor enters then of
30:29
increasing the price of wages and more
30:31
material is separate in other words you
30:32
have a average course turning up because
30:34
of the price of the factors of
30:36
production goes up as a result of all
30:38
this you have something out here you
30:39
shake average cost curve because of the
30:42
problem of indivisibility your you have
30:44
to get to the point where you’re using
30:44
up the indivisibility is your tapping
30:46
the you know using us the capacity of
30:48
the sixth equipment but there are
30:50
different degrees of indivisibility it’s
30:52
not just some things are fixing other
30:53
things a variable everything is variable
30:55
except with different paces a different
30:57
different rates a different and so and
31:00
then the best way to mesh them together
31:01
somewhere around here still is not
31:03
totally mesh together because life
31:06
doesn’t work that way they have
31:08
something like a u-shaped average cost
31:09
per let’s see the final conclusion
31:11
then more or less bereits of course
31:13
you’re usually operating around here in
31:15
this area and if you talk to a business
31:19
man if an economist coastal businessman
31:21
about they’re fooling average course
31:23
they don’t usually know what you’re
31:23
talking about because they’re not they
31:25
don’t think in terms of having producing
31:26
one car a year or two cars a year
31:29
obviously the thinking in terms of Lucy
31:30
a millionaire solving they’re not here
31:32
than the end and there MZ kind of ipod
31:34
hypothetical situation so there they
31:36
both business I think of course average
31:38
was more or less constant because
31:39
they’re dealing in a zone here more or
31:42
less are and in this area as a matter of
31:45
fact probably empirically most
31:49
situations the average cost curve
31:51
there’s nothing that says has to be you
31:53
shaped all we know is it starts off very
31:56
high had the clines it reaches a point
31:59
and then goes up again and so usually
32:01
empirically it’s generally something
32:04
like this those sound like this and use
32:05
it there’s a plateau and it goes up so
32:08
most doesn’t think of their average
32:10
course is constant because their deal
32:12
they’re dealing of course and practical
32:14
reality in this in the plateau area and
32:16
I’m dealing the areas where to start
32:18
having big increases in costs or areas
32:21
where they only producing five cards a
32:23
year or something so the more or less
32:26
you have this plateau situation and in
32:29
this situation of course marginal cost
32:31
will be somewhere below it I’m an
32:33
average course are falling module
32:34
quarters below it easing around here
32:36
somewhere on their marginal cost will be
32:39
higher here and that’s what to intersect
32:41
at the trough point and again too much
32:47
is made of this in the textbook they
32:49
think more boys are the great thing that
32:50
worried about the intersection but
32:51
basically the point is that this
32:53
marginal costs are set once you give an
32:56
average costs and in this situation here
32:59
with us a plant cell marginal courts
33:00
course would be identical an average
33:01
horse in this whole range and here’s
33:03
something like that marginal cost like
33:04
this up like that like that so this is
33:10
why most business centers they say talk
33:11
about marginal cost an average course at
33:13
all which usually don’t they say what
33:14
full concert is all equal and they and
33:16
it is for them and then the zone of
33:18
practical practicality it is he because
33:21
this is a region they’re dealing with
33:22
99% of the park
33:26
okay so this is the this is basically
33:31
the average cost marginal cost ick it’s
33:34
the summit’s of some use certainly the
33:37
idea of indivisibility is important the
33:39
average cost curve falling and then
33:42
being constantly going up again and the
33:46
idea of marginality is important as an
33:47
idea of focusing on the fact that
33:49
business event of interest in each
33:50
decision they want to make a profit on
33:52
each decision at least not make losses
33:53
in any any any given decision they’re
33:55
making during the course of the year
33:59
okay the endless okay now we take the
34:03
the maximum profit point or the maximum
34:06
profit diagram remember of us in our
34:12
total curve where the total revenue is
34:16
like that and total cost you like that
34:19
and just let’s say is this is a maximum
34:23
profit or with businessman if they know
34:24
the curves which is very big if we tend
34:27
to produce at this point where the
34:29
nicest properties of the maximum
34:31
transposing that to the to the average
34:33
marginal curve we have then the demand
34:38
curve is like this website something
34:40
like that and here’s the average cost
34:44
curve and then whatever and this case
34:47
the marginal revenue curve would be like
34:49
this and marginal cost curve will come
34:53
up like that and remember that given the
34:58
various assumptions given a one peak
35:00
curve okay forgetting about multi-piece
35:03
give it a one peak curve the max and
35:05
given this diagram we can’t
35:06
automatically see what the maximum
35:08
profit point is you can of this diagram
35:10
pretty obvious you know this is the
35:12
maximum profit point be given only this
35:14
diagram the only way to figure out the
35:16
maximum profit points by taking marginal
35:17
revenue equals marginal cost to the
35:19
client peering in other words this point
35:21
right here this will be the point of
35:24
maximum profit for the firm given the
35:25
similes curve given the situation and
35:28
we’re at this point see this as well ah
35:30
this point of production say it’s a
35:33
thousand widgets or whatever at that
35:36
point this is where marginal revenue
35:37
more
35:38
of course or equal the only point where
35:40
they’re equal at that point the total
35:42
profit will be will be the following
35:46
hello profit kill the average revenue
35:52
times Q price times quantity I total
35:56
revenue once yeah we’re going to minus
36:06
it really needs to be in the averages
36:09
total of you my total cost so the total
36:13
revenue is an average average revenue
36:20
times quantity minus average tourist
36:24
moans quietly so this is the white this
36:27
is Lee told hopelessly maximum profit
36:29
point where after now was at the point
36:32
where March revenue marginal costs are
36:33
equal average work average revenue times
36:35
quantity the total profit will be
36:38
average revenue x 20 minus average cost
36:41
times quantity in other words the
36:43
average revenue times quantity here this
36:47
figure minus average cost down here x
36:51
quantity so this the total profit will
36:53
be this area here with average revenue
37:02
minus average cost times quantity okay
37:05
this is will give you the total profit
37:10
at the maximum profit point but was at
37:14
the point where much of revenue marginal
37:16
costs are equal you know you then take
37:18
this this minus list this is on the
37:21
point of the man curve minus the point
37:23
on the total on the average cost curve x
37:26
quantity give me in this area this will
37:28
be the same as that as this line here
37:31
and this is a big this is always big in
37:33
the textbook we’re giving you these
37:34
examples of problems except for joining
37:36
the maximum profit pointless you grind
37:38
it out that way in real life of course
37:43
business energy to the totem why not go
37:45
for the total why worry about the
37:46
average but anyways is the way it’s done
37:49
on the books give it only this
37:51
information
37:52
in total profit you the maximum profit
37:55
point will be the point with these
37:56
marginal revenue marginal course
37:57
intersect and at that point the total
38:00
profit will be this area of course if
38:03
you’re making losses then your
38:07
unfortunate situation like such as that
38:10
follow as follows isn’t a man curve and
38:13
here’s average cost you’re always below
38:15
it you’re in bad shape so as this is I
38:21
guess will be the this is marginal cost
38:24
coming up like that the marginal revenue
38:26
this would be like the minimum lost
38:28
point here so you producer this level
38:31
this will be the loss of course you
38:35
would keep on like it should go out of
38:36
business pretty quickly maybe I’m not
38:37
gonna hang around and make losses
38:38
forever but this this would be the
38:41
minimum loss point this would be the
38:42
area of Los than quote at the minimum at
38:45
the point of intersection marginal
38:46
revenue and marginal cost this would be
38:51
the minimum loss point really the
38:53
average cost minus minus average revenue
38:56
times quantities at a minimum hopefully
39:00
of course usually the textbook this is
39:01
the example that you’re assuming the
39:02
term is making a profit doesn’t have to
39:04
make a profit I thing those divine law
39:06
so it has to make a profit so any rate
39:09
this is the essentially production
39:12
theory of production of the firm is
39:14
essentially list with the firm tries to
39:16
make a maximum profit the maximum profit
39:18
is determined in a one peaked curve
39:21
situation one pito revenue curve be at a
39:24
point where slope of the tangent sin the
39:28
word marginal revenue marginal costs are
39:29
equal so the marginal revenue cost and
39:31
marginal cost curves intersect and at
39:34
that curve the neither this line here
39:39
the total in a total diagram it’s very
39:42
simple it’s obviously much simpler just
39:43
look at this is the this is the
39:45
profitable positive this minus that in
39:48
this curve is more complicated like it’s
39:50
the area is subtract average review they
39:54
have average course of an average
39:55
revenue x quantity and it gives you the
39:57
total profit and even any questions on
39:59
this this is going this is a
40:04
high-powered
40:06
powered stuff of a month yeah huh yeah
40:10
given given your operating over the
40:12
other as I say you hear that from after
40:15
a certain why’d you go out of business
40:16
this would be the minimum war theory no
40:19
all the rest of it all this all of this
40:20
is lost because average cost is always
40:23
above average revenue in this particular
40:25
diagram so this is a minimal point given
40:28
I say you operate at all so uh and given
40:34
a one peak curve mud peak total revenue
40:36
curve if it’s to peak then all bets are
40:38
off the answer look for the you know
40:40
have to look to the inspector total but
40:42
the saying the textbook they never talk
40:45
about to peak is that screws up the
40:46
whole math and then hold of the whole
40:47
the whole geometry of it screwed up you
40:49
can’t rely on tangents and all this of
40:51
the second okay let’s take a ten-minute
40:55
break from your locations here this
40:57
analysis maximum profit say you’re here
41:00
Susan you’re all right your business
41:03
firm your business firm you’re here
41:07
you’re producing this much you’re in the
41:10
inelastic demand curve zone in other
41:12
words okay so you’re here this kind of a
41:16
situation prices and quantity so that
41:21
means that you’re in a situation if you
41:23
cut your production let’s say this is
41:24
fifteen hundred 100 units you cut your
41:28
production from 1500 less than a
41:30
thousand you approach your total course
41:32
go zags they always go down your cut
41:33
production but also your total revenue
41:35
goes up because you’re in elastic demand
41:39
curve for the firm therefore you will do
41:42
it if you’ve got its a businessman has
41:43
any smarts at all you will get the hell
41:45
out of the situation because all yeses
41:47
the cut production when he cuts
41:48
production the total cost goes down as
41:50
whole revenue goes up and he
41:51
automatically makes more money therefore
41:54
no business firm which has any smarts at
41:56
all will ever remain in this such in
41:58
this zone in other words the he’ll
42:02
always be in the zone here where the
42:03
even if he doesn’t quite hit the maximum
42:05
profit point which is difficult to do
42:08
because you always know what your demand
42:10
curve isn’t your cost curve is if you’re
42:12
in if you see at all all you have to do
42:14
is to cut cut costs your total revenue
42:17
goes up you will do it and so the
42:20
conclusion is every firm every business
42:22
from will always be you always produce
42:24
in an area where the demand for the man
42:26
curve is elastic in other words this
42:28
area here this is the only thing total
42:31
revenue curve is the elastic demand
42:33
curve zone so it means every firm will
42:37
have an elastic demand curve is if
42:39
they’re in an inelastic zone go
42:40
gallivant I’ll cut production quickly
42:42
the reason why I cut production are not
42:43
increase it because it’s very easy to
42:44
cut production they can see right away
42:46
few cut production of course the lower
42:48
you the mountain your coat revenues off
42:49
you’ll do it so this area is not viable
42:53
no firm will be in it so you have a very
42:57
important conclusion in your the
42:58
conclusion is that every sperm will have
43:00
an elastic demand curve will be in an
43:02
area where if the matter with elastic
43:03
was like like so if we’ve already seen
43:08
that the banker for the firm is more
43:10
elastic than the matter if the industry
43:11
as a whole because you have more range
43:13
of choice for consumer wonder beretta
43:15
pepperidge farm whatever is much more
43:17
range of choice than bread period but
43:19
now we email now we see more than that
43:21
not only will the masker for the firm be
43:23
more elastic than the man car for the
43:24
industry will be elastic period in other
43:26
words being a zone where the cut
43:28
production whole revenue goes up if you
43:30
increase production cut prices excuse me
43:32
program you goes up your raise prices
43:34
he’ll revenue or for you always be
43:35
affirmed always be in the zone because
43:38
if the firm isn’t this is an we’re
43:39
talking about a firm now not an industry
43:41
the firm will never be in this song
43:43
because it’s always always be
43:44
immediately profitable of cut production
43:46
cut costs and raise revenue know from a
43:49
given any smarts or get me in a
43:51
situation without losing money by
43:53
producing more okay so so every firm
43:58
will have an elastic demand curve now
44:03
this really this really covers our
44:05
theory of caution and demand ah we now
44:09
get for the whole area monopoly in
44:11
competition and the the I’m going to
44:14
save me much shorter than the stuff in
44:16
the book may have deal with some case
44:17
studies of course but basically the
44:22
with my textbook microeconomic survey
44:24
then 90 in the 1930s they erected a
44:27
so-called ideal which they’ve been
44:30
getting away from ever since I mean the
44:32
micro techs are much better now they
44:33
work 50 years ago they still have not
44:35
thrown over this alleged ideal system
44:37
the alleged ideal system well look at
44:40
this way and the situation where this is
44:43
a firm now may incur for the firm we’ve
44:46
seen the man curve for the firm of
44:47
elastic has to be elastic and any such a
44:50
rare for any firm which is trying to
44:52
maximize his profits ah according to the
44:56
theory of so-called perfect or pure
44:58
competition notice the name is perfect
45:04
and pure it’s a valuable load of
45:06
terminology although the economist claim
45:09
to be value free and non-emotive perfect
45:13
sounds good we see cities a situation is
45:16
perfect or pure it implies that it’s
45:19
good situations better be perfect and
45:20
imperfect it’s better to be purer than
45:22
impure perfect competition or perfect
45:25
are pure competition is defined as a
45:27
situation where the demand curve for the
45:29
firm is horizontal instead of being
45:37
simply elastic whether the man curve for
45:39
the firm is perfectly elastic or
45:41
infinitely elastic that’s supposed to be
45:44
the best situation why it’s the best
45:46
we’re going to do a little later it’s
45:49
say it’s unrealistic is putting it
45:51
mildly things it never exists the what
45:54
it implies is that regardless of how
45:56
much the firm produces it won’t have to
45:59
cut / don’t have to cut price we’ve
46:00
already seen the makers always falling
46:02
how can it be horizontally the theory is
46:05
it’s true that may occur if the industry
46:07
is falling but if each firm is very very
46:10
tiny so the weak market of the
46:12
classification big week industry each
46:15
form is only 100 acres or 10 acres if
46:17
Hiram Jones wheat farmer Iowa increases
46:20
the production like ten percent it’s not
46:21
going to affect the entire wheat market
46:22
on that basis a claim of the the banker
46:27
for each farmer is horizontal
46:29
indefinitely elastics not really because
46:31
obviously the angel Gabriel came to
46:33
Hiram Jones said look I can magically
46:36
each feature product my opinion fold it
46:37
will affect is the man curve you don’t
46:39
have to cut the price in order to sell
46:41
it as a given production very tiny
46:44
compared to the rest of the industry
46:45
does not improve a product as a product
46:48
of fixed forever doesn’t impede in any
46:50
any any other spectacular way in that
46:52
situation the man curve we almost looked
46:54
like it’s instantly horizont why is that
46:56
better who knows a certain ledge reasons
46:59
for if I think we’re all phony but
47:00
anyway this is supposed to be the ideal
47:01
situation the situation where
47:04
competition is perfect anything else
47:07
other words in real life for all the man
47:09
curves are falling even for Hiram Jones
47:11
certainly for everybody else every other
47:13
firm but it meant because of the firm
47:15
increases if it doubles as productions
47:17
will have to cut the price in order to
47:18
sell it as it faces a falling am anchor
47:21
or real life situations are attack of
47:24
being quote imperfect or impure or
47:27
monopolistic so the theory of monopoly
47:31
we’ve inherited from 1930’s is this very
47:36
weird theory where the only real
47:37
competition only perfect competition is
47:40
that each firm faces the horizontal man
47:42
curve says Eastern each firm a reality
47:44
including ourselves man if you go into
47:46
account engineer and you charge your
47:48
wage rate or affirm you’ll face a
47:50
foreign demand curve in other words if
47:51
you’re to insist on a I’m tripling your
47:55
salary going to get a much lower demand
47:56
for your services okay so everybody’s as
47:59
a quote monopolist in that sense or
48:01
monopolistic all life is novel it’s a
48:04
very peculiar kind of terminology you
48:06
see where everybody becomes a monopolist
48:08
by definition so so real life and every
48:13
firm r every individual or whatever
48:15
faces are falling demand curve it’s
48:16
called monopolistic imperfect than pure
48:18
no notice these economist claim to be
48:20
value free they’re scientists they don’t
48:22
they’re not passing moral judgments but
48:24
look at the moral judgment is implicit
48:25
in this and one hand yet perfect than
48:27
pure and and cool competitive and in the
48:31
other hand you have imperfect impure and
48:33
monopolistic obviously value loaded
48:36
terminology attacking this is being
48:38
somehow evil and and the antitrust
48:43
system for making from 1930’s until
48:45
about 20 years ago was designed to try
48:47
to force industry into the
48:49
be in bed of being pure perfect and for
48:52
every firm face the horizontal man I was
48:54
a break off industry you have a tiny
48:56
little firms with any rate this is say
49:00
the least not only is it unrealistic it
49:02
really is no there’s no reason to
49:04
consider this is better max it’s worse
49:06
to have pure composition and have to
49:07
call impure because situation every firm
49:10
faces but is so piney that’s can be
49:12
almost horizontal may occur to me one
49:14
wherever you firm is so small yaka tap
49:15
economies and large-scale production be
49:17
very costly for the consumer for
49:20
everybody else but anyway that’s the
49:23
whole shtick see the whole theory
49:24
monopoly is and all the other are you
49:27
all the other terms and oligopoly
49:28
monopoly imperfect all the same thing
49:30
all it all means that a firm is facing a
49:32
falling demand curve and notice what’s
49:34
happened here what’s happened here that
49:35
originally the terms monopoly in
49:37
competition both in the economics and in
49:39
real life with a fine very differently
49:41
I’m petilla 30 years ago 50 years ago to
49:44
find competition met rivalry it meant
49:47
you know people competing for business
49:49
services and that other people other
49:50
firms coming in and competing are other
49:53
people coming that’s what competition
49:54
meant monopoly meant government grants
49:57
of exclusive privilege of the one or
49:59
more firms I’ve already talked about
50:01
I’ll call more of that now when the
50:04
government says only the only the yellow
50:06
cab company that’s in Los Angeles only
50:08
the yellow cab company can operate can’t
50:10
nobody else that anyway anybody else I’m
50:12
operates a cabin shot or you know
50:14
arrested hey it’s not shot so in other
50:18
words the government grants exclusive
50:19
privileges to one personal or few people
50:22
or whatever keeping out all other
50:24
competitors that’s monopoly it’s what
50:25
Molly is always meant until 50 years ago
50:29
then the economist come along they
50:31
change the definition everybody’s
50:33
against monopolies for good reasons
50:34
because nopalea means first of all
50:36
you’re screwing the consumer you’re
50:38
taking you’re restricting entry into
50:41
return until taxi industry or the
50:43
medical profession or whatever and
50:45
you’re deliberately then Myra strictly
50:47
entry you’re raising the price of the
50:49
consumer has to pay and cutting the
50:50
production and naturally consumers are
50:52
against the thing know what’s going on
50:54
and competitors are against that those
50:55
are excluded from this global racket and
50:58
so the American market revolution for
51:00
example is revolution against monopolies
51:02
SP the British is the neo-gothic company
51:05
given the monopoly of C import of Tina
51:08
in the United States so and most of the
51:12
early state governments at
51:14
constitutional cooler than the state
51:17
constitutions against monopolies and
51:18
mint didn’t mean facing a falling demand
51:20
curve and then note the government may
51:23
not ran exclusive privileges to produce
51:25
or sell any any any particular product
51:27
they can’t say only three guys can
51:30
produce soil or whatever so this this is
51:34
so it was a good for good reason why
51:36
most of the people are against
51:37
monopolies and then let these people do
51:38
the Economist it was a change the
51:40
definition of term monopoly to me not a
51:42
grant of privilege by the government but
51:44
facing a falling demand curve which
51:46
everybody’s face means everybody’s an
51:48
evil monopolist and this changes the
51:50
whole the whole meaning of the
51:52
discussion the competition became not
51:54
competing for products or making better
51:57
products and making a cheaper or
51:58
whatever and meant competition meant a
52:00
horizontal a man curve I meant not being
52:02
able to affect your price regardless of
52:04
how much production a very weird and yet
52:05
this conquer of the economics profession
52:07
the same time when Keynesianism in
52:09
macroeconomics also concur don’t leave
52:11
them took about 50 years to get rid of
52:13
painting isn’t a roller back it’s taking
52:15
about the same amount of time to roll
52:16
back the perfect competition doctrine
52:18
and it’s been rolled back a lot in the
52:20
last 50 years or not enough of course
52:22
any rate I want to hand out the papers
52:24
exams shifter that I old is
52:27
spectacularly well almost too wel